Texas Firms Lagged in Revenue, Profit Growth in 2017, But Led in Cutting Expenses

The Texas region was the only one among 11 regions where firms reduced expenses in 2017, according to a new Citi Private Bank Law Firm Group report. But revenue, profit, and demand declined in the region, whereas they rose nationwide.

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While U.S. law firms saw an overall increase in revenue and profits of 4.5 percent in 2017 compared with 2016, those metrics declined in the Texas region in 2017, according to a new Citi Private Bank Law Firm Group report.

Revenue declined by 3.9 percent in the Texas region in 2017 compared with a 4 percent increase in 2016. John Wilmouth, senior client adviser in the law firm group, said 2016 was a strong year for the Texas region, so some of the revenue decline in 2017 is due to the comparison to a robust prior year. But, he also notes that in 2016, about 71 percent of the Texas firms in the report posted an increase in revenue, compared with only 50 percent of the firms in 2017.

On the profit side for the Texas region, net income declined by 8.9 percent and profits per partner dropped by 7.6 percent. Wilmouth points out that those statistics are in comparison with 2016, when the comparable numbers for the Texas region were up by 13 percent and 10.9 percent.

“Most of the [Texas] firms had a pretty good 2016. When you have a good year, sometimes it’s hard to follow up with another good year,” he said.

More positively, Wilmouth said the Texas region reduced expenses by 0.1 percent in 2017 and was the only region among 11 nationwide to cut expenses. This marks the second consecutive year that the Texas region was the only one to post a decrease in expenses, he said.

“Part of it is that they kept their lawyer compensation expense growth to only 2.2 percent, which is lower than any region, and also reduced operating expenses,” Wilmouth said, noting that the Texas region also reduced headcount in 2017, which affected that lawyer compensation figure.

“One other thing I’d say that stood out to me in this, to some extent from the reduction in headcount, also for the second year in a row, is they were also able to improve productivity,” Wilmouth said. “They are managing to keep their lawyers busy.”

For the report, the law firm group surveyed 189 U.S. firms, including Am Law 100 firms, Second Hundred Firms, and 55 niche/boutique firms. The Texas region includes a “wide spectrum” of eight firms ranging from Am Law 50 firms to firms outside the Second Hundred, he said.

According to the report, 2017 was a strong year for U.S. firms due to increased demand, but growth in expenses and a longer collection cycle put a damper on profit growth. However, the law firm group expects a healthy start to 2018 because of strong year-end inventory.

Total demand in Texas in 2017 declined by 2.5 percent, while nationally, demand improved by 0.7 percent. Total demand is hours logged by qualified timekeepers, Wilmouth said.

In Texas, billing rates increased by 2.6 percent in Texas in 2017, which is less than the 3.7 percent increase seen nationally. Wilmouth said the Texas region lagged in that area primarily because the equity partner headcount declined by 1.4 percent during the year.

“You take some of those higher billers out, it would naturally reduce the overall dollar value of the work,” he said.

Forecasting 2018, Wilmouth said inventory levels may depress activity in the Texas region during the first quarter.

“Inventory at year end was up 3.1 percent, which was lower than 6.1 percent in the industry. It may be a little more difficult to come out of the starting gates this year because they don’t have the inventory buildup,” he said.

Brenda Sapino Jeffreys

Senior reporter Brenda Sapino Jeffreys covers the business of law in Texas. Contact her at bjeffreys@alm.com On Twitter: @BrendaSJeffreys

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